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First Cap-And-Trade Allowance Auction Rakes In More Than $289 Million For State Coffers

California Business Advocates Remain Firmly Against Auctions

By Tiffany Rider
Senior Writer

December 4th, 2012 – The first of the quarterly cap-and-trade allowance auctions, held by the California Air Resources Board (ARB) on November 15, resulted in the sale of $289,102,449.90 worth of carbon permits primarily to entities covered by state law AB 32.

To give some perspective, that amount is 15.2 percent of the projected state budget deficit for the 2013-2014 fiscal year, which includes new taxes from the passage of Proposition 30. The state has two more chances to earn revenue from auctions before the beginning of the next budget year in July 2013. Unless, that is, if the recently filed lawsuit challenging the legality of these auctions proves to have merit in the courts.

“Over the past two years, repeated calls for the air board to remove the auction element from its cap-and-trade design fell on deaf ears,” Allan Zaremberg, president of the California Chamber of Commerce, wrote in a commentary available at calchamber.com. “We were left with no choice other than to sue.” The lawsuit, filed the day before the auction, claims that the ARB conducted the allowance auction as a means of generating revenue for the state – a process that is not authorized by the cap-and-trade law. The Cal Chamber aims to stop these auctions with this lawsuit.

HCVT - Certified Public Accountants

AB 32, the Global Warming Solutions Act of 2006, includes a component that allows the ARB to design a cost-effective, market-based approach to ensure entities that produce more than 25,000 metric tons of greenhouse gas emissions or carbon dioxide equivalents make an effort to reduce that pollution. In a teleconference on November 19, ARB Chairman Mary Nichols called the first allowance auction a “success” and a milestone in the process of becoming a leader in carbon emission reductions globally.

“By putting a price on carbon, we know that we are beginning the process of breaking our dependence on fossil fuels, moving at full speed toward a cleaner energy future,” she said. “That, in turn, will mean new jobs, cleaner water and air and a model that will be available for other states as well as the nation to use as we begin the battle against climate change and make our economy more competitive and resilient.”

Two types of allowances were sold last month: 2013 vintage and 2015 vintage. These allowances are being called compliance instruments and have different vintage dates based on when they become available to the purchaser. The only 2013 vintage allowances available at the first auction were those consigned by electric distribution utilities – a total of $23,126,110 – and all were sold. The final price per allowance was settled at $10.09 – nine cents above the floor price.

The highest bid for 2013 vintage allowances was $91.13. According to Gary Gero, president of the Climate Action Reserve, this is telling of the high number of entities, covered by cap-and-trade or not, that wanted to make sure they would get allowances. Ultimately, they only had to pay the clearing price. “It’s a particularly risk averse strategy,” he told the Business Journal. “There is a lot more uncertainty with the 2015 vintage.”

The results show that bidders asked for more than three times as many 2013 vintage allowances that were made available in the first auction. Gero said the auction didn’t necessary need to make more allowances available for that auction.

“The 2013s are not required to be surrendered for compliance until November 2014 and the full surrender is in 2015,” he said. “You don’t need to sell to all of the demand in the first auction. Though there were three times as many bids as actually sold, there were a lot of bids at that very low price.”

The 2015 vintage allowances sold – 5,576,000 out of the available 39,450,000 – settled at a price of $10. The top bid for these allowances was only $17.25. Future auctions will hold both consigned allowances and allowances sold by the state.

Of the permits sold, 97 percent of the 2013 vintage allowances were purchased by covered entities. Three percent were sold to financial companies, including Morgan Stanley Capital Group Inc. and Royal Bank of Canada, which will sell them on a secondary market. Covered entities were able to purchase 91 percent of 2015 vintage allowances sold. At least two companies with local facilities participated in the auction – Signal Hill Petroleum and NRG Power Marketing LLC, also known as NRG Energy (which has a plant in Long Beach).

Business entities including the Cal Chamber and the California Manufacturers & Technology Association (CMTA) have expressed concern that requiring the purchase of carbon allowances, rather than allowing the businesses to have these permits while they continue pollution-reduction efforts, will have a negative impact on the covered companies’ cost of doing business.

In addition, concerns have been raised that a spending plan for the allowance auction revenues has not been finalized. “The California Department of Finance has estimated that the auction of allowances during the budget year 2012-2013 would raise $1 billion, half of which would be available to offset general fund obligations,” according to a November 29 press release by the CMTA. “The balance would be spent on new, yet to be defined, programs to reduce greenhouse gases.”

The CMTA continued, “However, the nonpartisan Legislative Analyst’s Office (LAO) says the Governor and Legislature will probably only be able to use about $100 million to offset general fund spending because the money comes from a fee and state law requires fee-generated revenue to be spent on programs that relate to the purpose for collection of the fee.

The eligible programs identified so far include an energy efficiency initiative at the University of California, water use efficiency programs that cut down the amount of electricity required to move water, and a forest resource program. The LAO’s finding of fewer programs that would qualify for the funds was incorporated into the LAO’s calculation of the state’s $1.9 billion deficit through June 2014.”

CMTA is in support of the Cal Chamber lawsuit to stop the auctions, though Zaremberg wrote in his commentary that the “lawsuit does not challenge AB 32 or the merits of climate-change science.”